Before funds are committed on behalf of the institution there is a need to ensure that there are sufficient funds remaining in the Cost Centre to pay for the required goods or services. Modern financial systems provide commitment accounting and budget holders can obtain an accurate value for funds remaining within their cost centres. It is important to realise that the funds available to spend are not simply the unspent amount sitting in the Cost Centre, because there will probably be a number of purchase orders/contracts placed with suppliers that have not yet been delivered/ completed. The value of these commitments must be deducted from the funds remaining in the Cost Centre to determine the amount of money remaining.
Consider the Non-Pay Budget for Cost Centre A. Assume the date is 17 November 2004. The total non-pay budget for the year is £200,000 and payments of £96,500 have been made to date. It would appear that there is £103,500 available to spend [ie 200,000 - 96,500]. However, the value of any outstanding orders (commitments) must also be taken into account, because they will have to be paid for when the goods or services are delivered. Thus, the value of the outstanding orders needs to be taken into account. Here their value is £27,750. Therefore, the value of available funds is only £75,750.
Budget for Year (1.08.04 - 31.07.05) [A] 200,000
Total payments (up to 17 November 2004) [B] 96,500
Value of Outstanding orders [C] 27,750
Total committed value [D = B + C] 124,250
Available Funds [A - D] 75,750
This is a simplified example, in reality there may be many outstanding orders with different VAT treatments and, perhaps, currency fluctuations, however, your institution's Finance Department will provide guidance on the operation of its commitment accounting system.